An industry insider just blew the lid off the racket that makes American drugs so expensive

On a private Bank of America conference call, one healthcare industry insider explained how secret relationships within the industry contributed to the high cost of pharmaceuticals.

The relationships he described included a bunch of players, such as charitable organizations and pharmacy benefit managers — industry middlemen supposed to keep drug prices low.

Washington is starting to wake up to this, but more importantly, this insider says that payers are starting to hunt down the worst offenders and keep them away from patients.

The infamous "pharma bro" Martin Shkreli is in jail, but the egregious drug-price-gouging scheme that shocked America and made him a household name last year is still doing just fine.

Now, you'll recall Shkreli is not in jail for price gouging, but defrauding investors.

But we know who he is because in 2015 he bought a decades-old AIDS-related treatment and then unapologetically raised the price more than 5,000%. At the time, his wasn't the only drug company doing that kind of thing, and that remains true today.

What has changed, though, is that the people who pay for these drugs — the insurers and health plans and even small cities— are finally starting to do something about it.

And they're starting to explain in detail just how this works and how many people are involved in a drug-price hike.

We got the best look at this pushback on Wednesday when Bank of America Merrill Lynch got its clients together for a venerable Wall Street tradition: a call outlining the risks in the year ahead.

This one was about the pharmaceutical industry. And it was a complete and total takedown.

BAML's industry expert broke down the secret of how drug-price gouging is perpetuated in the pharmaceutical industry more candidly than we've ever heard before.

Spoiler alert: The drug companies aren't doing this alone.

A new poster child

To understand this call, a recording of which was obtained by Business Insider, you first have to familiarize yourself with a couple of things:

Acthar: A $36,000 drug of questionable efficacy, according to the medical journal JAMA, made by Mallinckrodt Pharmaceuticals. Though the drug's primary use — its "indication," in pharma speak — is for children, Medicare, a program for older people, spent $500 million on it in 2015. It was one of the program's 20 most expensive drugs. Only 1% of doctors prescribe it.

Pharmacy benefit managers: Also known as PBMs, these are the gatekeepers between the maker of a drug and the people paying for it. They're supposed to keep prices low, but critics say they just inflate prices by taking a cut from every part of the drug-pricing process. PBMs manage lists called formularies that say what drugs an insurer will pay for. Drugmakers offer rebates to lower their prices and get their products on that list (and to you). The PBMs keep some of that rebate, but no one knows how much, because it's a secret. Three PBMs — Express Scripts (the largest), CVS Caremark, and UnitedHealth — control about 80% of the US market.

Charitable assistance programs: They sound nice, but they've become a huge controversy in the world of pharmaceuticals. The feds are investigating whether pharmaceutical firms are essentially paying charities to steer patients toward their drugs. In the past, drug companies have used the existence of charities to justify price hikes.

The expert on Wednesday's call was a man named Chris Guinther, the systems director of PBMs and specialty pharmacies for the Mercy Health System, the largest such system and the fourth-largest employer in Ohio.

He says that because of news reports, payers are starting to look at the expensive drugs that use charitable programs and requesting they be knocked off their formularies.

Guinther excluded Acthar from his formulary about a year ago. He said he went from paying millions of dollars a year to zero with no patient disruption.

Business Insider

We're not going to take it

More payers are starting to do this to cut costs, but Guinther warned that they may get some pushback from PBMs.

That's where a bunch of opaque relationships that keep this system alive come into play.

Mercy has what's called a closed formulary, designed in-house. Most companies, unfamiliar with the complicated world of pharma, use the national formulary, designed by a PBM.

And some PBMs have really close relationships with the drugs on those formularies — remember, they get a cut of the rebates.

For some drugs, though, it goes even deeper. Express Scripts sells Acthar almost exclusively through its specialty pharmacy, Accredo Health. And Acthar's charitable program was managed by United BioSource, a company Express Scripts sold earlier this month.

"I think that there needs to be more self-regulation and transparency in terms of how all these relationships work," Guinther said.

"Express Scripts folks have said Acthar is not a good drug, and yet they operate the hub, they are funneling prescriptions through themselves through Accredo, and there are nondisclosed performance rebates between Mallinckrodt and Express Scripts," he added. "So I would argue there's a lot of money changing hands."

The way Guinther tells it, everyone is getting a cut — the drug companies pay the charitable foundations, as well as some healthcare providers (like doctors) to consult and do speaking engagements.

"The last I heard from Mallinckrodt, they were proudly announcing how they gave away half a billion in Acthar," he said. "And I kind of have to laugh because they gave away half a billion because they raised the price that much."

This is how the whole thing is perpetuated. It takes a village.

"For people with Express Scripts, Optum, and CVS, I think there needs to be a greater call for exposing these relationships, and I also think there needs to be a clearer understanding of what happens if you don't have a custom formulary," Guinther said.

He added: "If you have this national formulary where Acthar is on there, how is your PBM going to help you make your decision?"

Then, at a luncheon with investors in New York a few days later, the company acknowledged that at least one big payer had started putting severe formulary restrictions on the controversial drug, according to a person who was there.

Mallinckrodt declined to comment for this story.

The do-nothings

So far, Washington has been noticeably absent from this story, despite all the talk of punishing pharma for its most egregious abuses.

In fact, if you ignored the rhetoric, you'd probably think DC is happy with the industry. The Trump administration has done absolutely nothing on drug pricing, and the industry is elated about the tax break it's about to get.

But people are at least talking about these relationships.

Earlier this month, the House Energy and Commerce Committee held a hearing on the drug supply chain and its effect on pricing. It didn't go well for the industry, and the whole thing devolved into the drug companies blaming the PBMs, the PBMs blaming the drug companies, the pharmacies decrying getting crushed by the drug companies and the PBMs, and so on.

Frankly, the whole exercise seemed to frustrate legislators.

"I can't for the life of me figure out what you do," Republican Rep. Morgan Griffith of Virginia told the lobbyist representing the large PBMs. "We've got this black box called a PBM ... and they" — the drug companies — "are saying they've got to raise their prices to pay you."

Democratic Rep. Diana DeGette of Colorado started asking about the administrative fees PBMs collect from the drug companies. Her colleague, Rep. Jan Schakowsky of Illinois, wanted to know how much money was going to charitable assistance programs — a question drug companies definitely don't like to answer (we've tried to ask).

None of this is enough on the policy side, and what's happening on the payer side is just a start. But at least someone out there is talking about how deep the scam runs, even if it is on secret Wall Street investor calls.